Will austerity measures fix Zim’s economy?

30 Nov, 2018 - 00:11 0 Views
Will austerity measures fix Zim’s economy?

eBusiness Weekly

If we were to ask Zimbabweans to name just one thing they would want fixed first in the economy, they would without doubt tell you they need a stable currency to use for their day-to-day transactions.Following the hyperinflation era, the country adopted a multi-currency system that was anchored on the US dollar. In the early days, the rand was also a very strong currency and people in the southern parts of the country, including Bulawayo, would actually prefer using the rand at the expense of the US dollar.

But because of its volatility and loss of value, the rand was soon elbowed out of the system, meaning the US dollar now had to be spread thinly across the country.

Even then, while not as bad as now, use of the US dollar was always problematic for the country. In its 2015 Global Competitiveness Index report, the World Economic Forum said the country had a 45 percent overvalued exchange rate.

The Reserve Bank of Zimbabwe also acknowledged the same. In a working paper, “Assessing the Impact of the Real Effective Exchange Rate on Competitiveness in Zimbabwe”, that was published in 2015, the RBZ said the country’s real effective exchange rate had been overvalued since the adoption of multi-currency regime in 2009. It said the magnitude of the over-valuation, however, increased significantly starting in 2011.

“The results show the real effective exchange rate gap of about 45 percent by end of 2014, implying that the currency is overvalued to that extent. The overvalued exchange rate has been hurting export competitiveness, with exports remaining subdued against a huge import bill,” the RBZ said.

You could also see this in our pricing, as prices of basic products and services were much higher than import parity prices.

Prices, however, eased off in the following years, with the country experiencing negative inflation from February 2015 till January 2017.

At that time, the RBZ’s proposal of dealing with the challenge was to undertake fiscal and internal devaluation to eliminate the disparity between the current account norm and the underlying current account deficit.

Fast forward to now, the challenges are still the same, currency distortions, weaknesses and limited availability.

But this time around, instead of fiscal and internal devaluation, the new sheriff in town, Finance and Economic Development Minister Professor Mthuli Ncube is talking of “Austerity for Prosperity measures”. Some of the measures include increasing duty on fuel by 7 cents, asking imports of certain products including cars to be paid in foreign currency, and delaying the purchase of vehicles for Government officials and Members of Parliament.

If the first two months of these measures are anything to judge by, then one would be tempted to say Minister Ncube is on the right path.

During the two months’ period, the economy achieved a budget surplus of $29 million in the month of October, the first time in many years.

This positive showing follows another significant decline in the budget deficit in the previous month of September when the budget deficit was approximately $19 million, down from $651 million in August and lower than the targeted $99,9 million.

But the question is whether austerity measures alone will fix Zimbabwe’s economic challenges. There is need to compliment these measures with structural reforms that contribute to removing barriers to the smooth and efficient functioning of product, capital and labour markets and to ensuring the environmental and economic sustainability of growth.

Such reforms are meant to tackle obstacles to the fundamental drivers of growth thereby encouraging job creation and investment and improved productivity.

Zimbabwe’s ease of doing business global ranking of 155 out of 190 countries is not encouraging and might act as a deterrent to potential investors.

The overall business environment can be improved through regulations supporting more flexible labour markets, a simpler tax system or less red tape, making it easier for companies to conduct business and plan for the future.

Reforms which increase access to education or lower tax evasion and corruption would also help support economic growth while promoting social fairness. As much as we need austerity measures, structural reforms are important for future growth and for strengthening the economy.

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